Interview with Jon Faine, 774 ABC

JON FAINE:

Joe Hockey, good morning to you.

TREASURER:

Good morning John.

JON FAINE:

You said yesterday, in launching your paper – your discussion paper – that everything’s on the table. So, if you wanted to design a tax system from scratch – white clean sheet of paper, what would you do?

TREASURER:

There’d be no exemptions, it would be fair. It would be lower overall and importantly…

JON FAINE:

But let's get into details, how much would be personal tax from income, how much would be company tax?

TREASURER:

It's a very good question. And it's very hard to do on a blank sheet of paper in an ABC studio in a short period of time. But what we're seeing is the world economy changing quite dramatically and the tax system that we have was designed in the 1950s for a highly regulated…

JON FAINE:

We've heard that. I want to move past that.

TREASURER:

I know, but in order to be able to design a future tax system, you've got to think carefully about what the future economy is going to look like. Seventy per cent of our economy is services. When this system we have today was built, manufacturing was a much larger part of the economy; it was a highly regulated economy. Increasingly, we're going to see free trade and the internet completely change the way we do commerce.

JON FAINE:

Okay, if that didn't work, let's try a few other things. First of all, tax is optional for a lot of people; agree or disagree?

TREASURER:

I disagree.

JON FAINE:

A lot of people manage to structure their affairs so they make no contribution to the revenue whatsoever; agree or disagree?

TREASURER:

Disagree.

JON FAINE:

But it's true.

TREASURER:

No, you said a lot of people. I don't agree at all. I think – well, everyone in one form or another pays the GST as a starting point. If you earn an income in Australia it is very hard not to pay personal income tax.

JON FAINE:

But people structure their affairs so that they have capital gains rather than income or they earn income in trusts…

TREASURER:

Well, then they pay capital gains tax.

JON FAINE:

Or they offset it through all sorts other structural [inaudible]. If you earn enough money you can avoid tax.

TREASURER:

Hang on, hang on. Be careful, because for example, with trusts it might not be taxed in the trust but it's hands – it's taxed in the hands of the distribution by the trust. So, people that have money distributed to them from a trust end up paying income tax on that distribution. So, the trust is a flow-through vehicle. Companies pay tax if they're making a profit, which we hope they do. And if you're making capital gains you should pay capital gains tax. Now, there are going to be – there are many exemptions and there are many trade-offs in the tax system and it's a patchwork quilt. There's no doubt about that. That's why we need to have a serious discussion about what it should look like into the future.

JON FAINE:

I can use debt and associated entities that are heavily geared, and borrowing in order to create debt that offsets income and offsets profit and tax and then I end up not making any contribution at all, plenty of people are doing that as well.

TREASURER:

You're talking about negative gearing, and…

JON FAINE:

Negative gearing through property or shares?

TREASURER:

Well, that's true but it's much better to make a profit than to make a loss because ultimately you make more money out of a profit than you do out of a loss.

JON FAINE:

That's fine for the taxpayer; it's no good for the revenue?

TREASURER:

Well, we want people to make more profits and if they make more profits they pay more tax.

JON FAINE:

But if they're offsetting and they're not taking a profit they're not making a contribution to revenue and that's what people are doing and it’s no secret…

TREASURER:

Yeah, but it's not sustainable. I mean it assumes you're going to get a return from capital gain. Now, the property market is doing well. It doesn't always do well. There are people – a lot of people, who have lost a lot of money on property. And of course we saw a lot of people lose a lot of money on shares during the Global Financial Crisis when they'd gone into margin loans, they’d negatively geared shares, the capital value of the shares plummeted and people were under water and in a number of cases people lost their homes.

JON FAINE:

Let's get to negative gearing and we'll get to super in a moment. The Labor Party held out an olive branch last night on 7:30 on ABC TV. Negative gearing – it's clear it's going to be grandfathered but how? Which way is it going to be grandfathered?

TREASURER:

Again, I'm not going to get into specific outcomes. You're asking me to go five months ahead of where we are now, which is to open the conversation about all the issues and this 200-page report…

JON FAINE:

Is softening us up for this. So, let’s get…

TREASURER:

No, not softening. Hang on, hang on, be patient [inaudible].You’ve got to be patient. I encourage people to read the discussion paper; I encourage people to go to the website, which is bettertax.gov.au and look at all the facts. Let's just come back, can we come back for one minute because I really do want to talk about the economy, if you don't mind?

JON FAINE:

Your time starts now.

TREASURER:

Well, I'll be quick. You know, we've seen this massive transformation, just over the last decade in particular. But the last time we had a serious tax chat, which was really 1998 and you remember that – the GST and new tax system, all these businesses that are around today like Uber or Facebook…

JON FAINE:

All the disruptive technology.

TREASURER:

They weren't around then and this is completely transforming the way we do business. So, people say, ‘well, let's just expand the GST’. Well, you know, there are a number of companies selling goods into Australia that don't charge a GST because they're located offshore and we can't force them to charge GST. We're going to try and we are trying. But therefore there is a leakage in GST, the same with company tax. Celebrated cases in Australia – or uncelebrated cases in my view – cases in Australia, major multinationals that are supplying services and goods to Australians over the Internet, they're not paying tax. So, we've got to plug those holes as a starting point.

JON FAINE:

The minute's up, beautifully timed. Two different ways to grandfather negative gearing; you can quarantine to offset losses against income just from that source so you can offset a loss from a loan against the income from, for instance, an investment property…

TREASURER:

Which is arguably – well, it is meant to be the case in certain circumstances now that you can only offset the losses against the income from that asset. But, you know, particularly you know the previous Government introduced it in relation to certain business losses but at any rate, we're getting a bit technical.

JON FAINE:

…or you can say up to a certain date, as you did with capital gains tax years ago, you the Government did with capital gains tax…

TREASURER:

You grandfather…

JON FAINE:

…you can say, there’s this particular date after which, do you know which way do you think is better?

TREASURER:

No, I’m not going – I know what you're trying to do and I'm not going to bite. It is, in relation to negative gearing of residential property – because I think that's what you're getting at – the issue is, and it's a big question about whether you are actually going to see rents rise dramatically to compensate for the loss of tax advantage for the investor. Now, if there's a dramatic increase in rents, and last time Labor tried this in the '80s, there was a massive increase in rents according to analysis, in one city – in one city, I accept that, in one city. But…

JON FAINE:

Along with other factors that contributed.

TREASURER:

There were other factors but…

JON FAINE:

Negative gearing was blamed.

TREASURER:

The trade-off as you and I have talked about was, for example, in Europe, they have rent control. In a number of other jurisdictions they have different set ups. So, you can't look at negative gearing on residential real estate in isolation without looking at rental affordability and looking at all the other factors that come into play, for example…

JON FAINE:

John Symonds from Aussie Home Loans says, ‘you've got to scrap negative gearing in the luxury market. You can buy $10 million worth of real estate in a luxury house, rent it out for a fraction; you just claim the losses on the loan through negative gearing and get rid of all your tax liabilities while you're speculating on capital gain in the real estate market. That's what heaps of people are doing.

TREASURER:

I don't think heaps of people are doing it.

JON FAINE:

How many people negatively gear in Australia now?

TREASURER:

Well over a million, I think it's probably – I think it’s over 1.2 million.

JON FAINE:

So, that means there’s like 23 million people who aren't?

TREASURER:

But not many of them have $10 million houses, right? There are people that do that. They do it with commercial property, which in turn is productive, they do it with agriculture.

JON FAINE:

But why should five per cent of the population get the benefit of something while 95 per cent of the population are missing out?

TREASURER:

The argument has always been that it adds to the housing stock. That is, it creates…

JON FAINE:

Then restrict it to houses under construction rather than speculation on property already built.

TREASURER:

Well, you're welcome to put in a submission, John. In fact, you are.

JON FAINE:

Or do you cap it on total losses?

TREASURER:

Consider this a submission.

JON FAINE:

Moving to super concessions. On 7.30 last night, the Labor Party held out an olive branch. Are you prepared to meet with them and discuss a bipartisan approach to ending rorts and concessions?

TREASURER:

Look, I really think – I would love to have a bipartisan approach in all these issues because whether it's a Liberal government or Labor government, whoever it is, we're going to have the same problems. We're going to have the same challenges. So, if there's a bipartisan approach to fixing it then we can actually have some long-term stability, which I'm really keen for, right? So, in relation to superannuation I think there's a bigger issue at play, which is about the stability over decades of retirement incomes policy and you've got to deal with the interaction between the superannuation system and the age pension system, and of course something that has emerged in more recent times is the interaction with aged care and home and community care. So, it is now a much broader issue than just focusing on superannuation or just focusing on the pension. This is something we have under very active consideration at the moment.

JON FAINE:

A couple of other quick things. Cash economy, why not clamp down, resource the Tax Office instead of stripping it of resources, give it money, give it staff so that they can clamp down on the cash economy which is a major leakage for the tax base?

TREASURER:

The Tax Office currently has more than 20,000 employees.

JON FAINE:

But you're reducing its numbers.

TREASURER:

Well, no. I did reduce it on the same timeframe as the previous Government announced. So, we've reduced staffing levels to be more efficient. The Tax Commissioner tells me he is doing everything he needs to do with less resources. Now, that's a good thing. We want it to be efficient. Including, it has now embedded people into the offices of some of the multinationals that are operating in Australia and haven't paid tax. So, we've asked that, you know, we've put Tax Office officials into those businesses that everyone names, which I can't name, that are seen not to be paying tax, to better understand their business model to make sure they do pay tax. So, we've done that with resources. If every time I just threw more money at the Tax Office, more money would come out like a poker machine that keeps paying every time you pull the lever, I mean, I'd do it but it's not like that. It doesn't work like that.

JON FAINE:

Bank deposits tax; if the banks treat roll overs as separate deposits and there’s some suggestion they’re going to, then every time anyone rolls over from the their self-funded super or their retirement savings, they roll over a 90-day bill or a six month deposit – term deposit, they’re going to be taxed again and again and again on the same [inaudible] that wouldn’t be fair.

TREASURER:

This proposal – let me explain this so-called bank tax proposal came from. It came out of the Global Financial Crisis and most countries around the world put in place a government guarantee on deposits up to a certain amount of money. Australia’s quite generous at $250,000. Others put it at $100,000 and so on. So, the government guarantees that money. The question is if there’s a bank failure, do you impose a levy on all the banks after the failure or do you impose the levy on the banks before the failure and prepare a pool of money. Now, the previous Government – Chris Bowen announced he wanted to have a pre-failure tax; that is raise the money in order to prepare for a rainy day. Now, they announced that, they put it in the Budget but of course they never legislated it and that’s fallen on us to legislate. I had concerns about the proposal. I put it to David Murray for a full review in the Financial Systems Inquiry. He came back and said, ‘we don’t think you should, on balance, proceed with it. You should have a tax after a failure rather than before’. That’s a moot point in my view because if there’s a failure, you may well have a banking system that is under a lot of duress and then to go and impose a new tax on it afterwards when it least needs it, is not necessarily a good idea. This is something we’re weighing up and responding to. The other thing is, the banks are being asked to raise more capital…

JON FAINE:

But someone who’s got a sum of money – a lump sum in there, they’re risk averse; they don’t like the stock market, they don’t like other investments, they leave cash in the bank…

TREASURER:

The stock market investment’s not government guaranteed nor is all these other things.

JON FAINE:

[Inaudible] but if you’ve got cash in the bank – you might have hundreds of thousands of dollars in the bank, that’s your capital, it’s your nest egg, you’re rolling it over in six month deposits. Every time you roll it over you’re going to get hit with a tax just for the same amount of money?

TREASURER:

I would need to have a look at the mechanics of that…

JON FAINE:

Do you agree it sounds unfair?

TREASURER:

Well, it depends if it’s a new account and if it’s a new interest rate and a range of other things.

JON FAINE:

It’s just a roll-over.

TREASURER:

Well, I’ll have a look at it, John; I’m not going to make up policy on the run.

JON FAINE:

Let’s get to callers. I’ve got questions about your meeting with the State Treasurer yesterday as well. [inaudible] in Bentley is first up with Joe Hockey. [Inaudible] good morning, thanks for waiting.

TREASURER:

Hello [inaudible].

CALLER:

Good morning, is that Mr Hockey?

TREASURER:

Yes it is ma’am.

CALLER:

Listen, you say that you’re going to put everything on the table and look at all tax things. Is family trust also on the table?

TREASURER:

Everything is to be looked at because we’re looking at the entire system and in the case of family trusts, there is a very important role for a lot of them, particularly for a lot of farmers who are trying to preserve the asset through the generations – keep the family farm intact, or a family business, trying to keep it intact during the generations. And of course, when the money is distributed from that trust, then it is taxed at the personal tax level of the individual that receives the money from the trust.

CALLER:

Put it this way, when the GST was spoken about and Mr Costello was asked of this question, he said, yes, when we get GST up and running we will certainly then tackle the family trust because family trust – people put family trust mainly to avoid paying more tax’.

TREASURER:

No, they don’t. I don’t believe they do. I think a lot of those loopholes have been closed over time.

CALLER:

[Inaudible] seem to be putting this under the carpet. I would really appreciate – I mean, not me, a lot of people would appreciate that if this is also taken and given a good look and put in the spotlight.

TREASURER:

If there is any distortion or if there is any massive advantage gained, it comes about because, ultimately, there are discrepancies between the various levels of tax. So, when you have, for example, personal income tax at it’s highest level at 47 plus the Medicare levy – 49, and you’ve got company tax at 30, people start to look at various vehicles to try and minimise their tax…

JON FAINE:

Call themselves consultants and contract themselves to their own businesses.

TREASURER:

That’s right, there’s a range of things people do. In the case of trusts, the issue is about, you know, whether it’s taxed in the trust, which is not necessarily the case at the moment, or its taxed when the trust distributes the money and it actually is taxed arguably at a higher level when the trust distributes its money.

JON FAINE:

Alright [inaudible] I’m going to move on, and thank you for your question. Janet in Albert Park, you’re through to the Treasurer. Janet, good morning.

CALLER:

Good morning. Good morning Mr Hockey. Mine’s quite a sort of longish question, so sorry about that…

JON FAINE:

You might be sorry if I interrupt you Janet.

CALLER:

Okay, I’ll get on. I understand Mr Hockey you’re from a migrant background and that you had opportunities while at school to attend a good university and therefore become highly qualified. I also understand that you own multiple properties in Canberra, Sydney and somewhere else in New South Wales coast, and therefore you were probably in a position to meet a well-connected people, one of whom you’ve married with a corporate role…

JON FAINE:

Janet, this is very personal. I’m not quite sure what the point of it is?

CALLER:

I just wanted to know whether if the same conditions had applied when Mr Hockey was growing up that he proposed in last year’s Budget, whether he’d had ever got where he got to today; I feel that he’s shut the door after he’s gone through…

JON FAINE:

Are you talking about uni fees for instance?

CALLER:

Yes, uni fees, visits to doctors, unemployment benefits for people who’d left school and trying to find work, waiting for the dole. All those sort of things that applied to young people and poorer families – whether they’d applied when he was a child and a teenager and a young man, whether he’d actually be where he is today. I don’t actually want an answer, I just want him to think about that.

JON FAINE:

You wanted to make a speech, Janet well, I asked you to ask a question. I’m going to turn it into a question. Joe Hockey, Janet’s querying your fairness.

TREASURER:

Well, given that she raised my family background; I grew up in a small business family that in the early ‘70s, nearly had the family business fall over and as the youngest of four children…

JON FAINE:

You’re dad ran a deli, I think didn’t he?

TREASURER:

A real estate agent – set up a real estate agency in 1969. Now, I remember in the early 70s, and I was quite young, being the youngest of four children, and dad coming home one night and saying, ‘I think I’ve lost the business, and you know, I think I’ve lost the house’. And my mother, as mothers did – always do, she said, ‘well, like hell. We’re all going to work’. My two older brothers were then responsible for driving people around and showing them real estate even though they didn’t have driver licenses. My sister answered the phone and I was in charge of sweeping out the front of the shop. And it was bloody hard and that uncertainty of losing your home, losing everything you have, is very real. So, I say to this lady…

JON FAINE:

Janet says have you lost sight of [inaudible]

TREASURER:

No, I haven’t lost sight of it at all. I live and breathe it every day. I live and breathe the fear of failure every single day for every business and when I was a lawyer, the thing that broke my heart was foreclosing on behalf of a bank and that was the end – I couldn’t do law anymore. I didn’t go into law to do that sort of thing. I went into law to build things. I went into politics to build things; to build hope. And you know, I’m sorry that lady has that perception of me because I don’t have multiple properties, my wife earnt them. My wife came from western Sydney, worked damn hard coming with nothing in her life and everything we’ve got, we’ve earnt.

JON FAINE:

And she works for one of the big banks?

TREASURER:

No, she doesn’t anymore. She’s now sitting on a number of boards, but she did and she did it all herself – all herself, with nothing.

JON FAINE:

So, Janet’s attacking your values saying you’ve lost sight of what it’s like for people on the other end of the spectrum.

TREASURER:

Well, I haven’t lost sight of my values because I live and breathe them every day but like so many other Australians, I want things to get better. I want things to be better for my children than what I have as my parents wanted that for me and that’s what we expect as Australians to do – leave the place in a better shape after we’ve gone.

JON FAINE:

Alright Kevin [inaudible]. Good morning, Kevin.

CALLER:

Good morning, good morning gentleman. Mr Hockey, the GST – good luck getting it past the states if you try to change it but anyhow, I’m against changing the GST. However, when you’re talking about a change to the GST, why on earth do Treasury and yourself just go in five per cent increments? What’s wrong with say, 11.8 or 12.2 or 13.1 per cent? You should calculate how much money you need and then work that out and bring it back as a percentage basis. It may even come out at 17 per cent. You’ve got to work it out, not just pick a number out of the air. I’ll lend you a calculator if you want one?

TREASURER:

Thank you. I’d say to you this: we haven’t got a plan to increase or broaden the GST. Everyone’s trying to narrow the entire tax debate down to the GST. The GST is $54 billion out of the $400 billion we need to raise every year. Our biggest tax by far is personal income tax, which is $170 billion. Our second biggest tax is company tax, which is around $70 billion and then the third biggest is the GST and every dollar of the GST goes to the states. So, Federal Government doesn’t use any of the GST. The reason why it is in five or 2.5 per cent increments is the simplicity for small business associated with that, whether it be five per cent, 10 per cent, 12.5 per cent or 15 per cent. It’s the simplicity that is…

JON FAINE:

For the calculations….

TREASURER:

For the calculations.

JON FAINE:

…everything. You’re never going to do an 11.7 or something. That’s just not going to happen, surely? Blair from [inaudible] Morning to you Blair.

CALLER:

Yeah, G’day. I just wanted to say, Joe, hearing you unplugged, mate, good on you and good on your missus. I’m proud of you, I think the whole country is proud of a man like yourself that has pulled themselves up and all power to you and great radio, Jon Faine.

JON FAINE:

That’s very kind of you and thank you indeed.

TREASURER:

Thank you very much.

JON FAINE:

We don’t often hear our politicians talking that way, do we Blair?

TREASURER:

No, it’s just great. You’re a champion, Joe, good on you mate.

JON FAINE:

I’m going to break out of role here, Joe Hockey and say we had Bill Shorten in this chair two weeks ago and we were trying to have a conversation with him about precisely that – about values and motivation and well by all accounts, from the use you made of the transcript in the Parliament in Question Time apart from elsewhere, it had precisely the opposite reaction with the audience.

TREASURER:

I am trying to recall what was said?

JON FAINE:

He was quoting Martin Luther King sitting in the chair you’re sitting in right now and you were ridiculing him in the Parliament in Question Time – well, not you personally, your Party was ridiculing him.

TREASURER:

I don’t go after people [inaudible]

JON FAINE:

Few quick things just before we run out of time. To [inaudible] you’re meeting with him in a moment, but the Commission of Audit – Tony Shepherd’s Commission of Audit, which is where you started as Treasurer, looking at the expenditure side, do you now regret having focused exclusively on the expenditure side for the first 18 months of your term in office?

TREASURER:

No, because that’s where our main structural challenge is – on the expenditure side. I mean, the trajectory of expenditure is unsustainable in Australia. There’s no doubt about that. I mean, government expenditure – locked in expenditure, is unsustainable even today.

JON FAINE:

But it locked you into being mean and nasty Joe Hockey instead of reforming Joe Hockey trying to fix the tax base.

TREASURER:

Well, you’ve got to start where the fire is and try and put it out…

JON FAINE:

Was it a strategic or political error?

TREASURER:

No, well it’s the right thing to do, John. You’ve got to start reducing – if you can’t increase – when an economy is not as strong as it could be, you can’t tax your way to prosperity. You’ve got to reduce your expenditure where you can; get rid of the waste and that’s what we started to do. We were trying to reduce our expenditure because to impose new taxes on the economy would actually cost jobs…

JON FAINE:

But you’ve painted yourselves into this mean and nasty Tony Abbott and Joe Hockey corner.

TREASURER:

Well, I’m sorry that that’s the case because we’re trying to do what is right for our country. I mean, I know it is unpopular. I know it’s difficult and I know it can be very difficult for a lot of people but we’ve got to do what is right.

JON FAINE:

In the minds of lots of people, what’s right for this country is to make large corporations that are avoiding tax by locating subsidiaries offshore – making them actually pay.

TREASURER:

Amen, I’m with you. I’m with you and watch this space.

JON FAINE:

[Inaudible]

TREASURER:

Look at the reaction on the [inaudible] that Labor announced now and in terms of a super profits tax, well, you know there’s one thing worse than a bank that is making a profit, as one of my colleagues said, it’s a bank making a loss, because we all pay the bills then.

JON FAINE:

Alright and finally just before we go to the news, you met yesterday with the State Treasurer while you were here in Melbourne, with Tim Pallas to discuss the Commonwealth contribution to Victorian infrastructure. You are at a logger-head. You want to spend money, and Tony Abbott wants to spend money on roads. The State Government wants to spend the money on public transport. Did you come to an agreement?

TREASURER:

For a start, we are absolutely committed to East West. We’re not wavering in any way on our commitment to that; that’s 7,000 jobs, 600 already underway but all being junked by the new Government. But, I want to see jobs. I want to see infrastructure. I said to the Treasurer – and we had a very good meeting – that as part of our Asset Recycling Program, with the sale of the Port of Melbourne, if it gets the proceeds that may be anticipated, there’s a billion dollars that the Commonwealth Government will make available for things including public transport in the middle of Melbourne, for things including that. So, we would work with them…

JON FAINE:

Will you fund metro-rail?

TREASURER:

That billion dollars…

JON FAINE:

From asset-recycling?

TREASURER:

From asset-recycling – could be used for metro-rail. Yes, I’m prepared…

JON FAINE:

But what about the billion and a half you advanced for East West; can you reallocate that to metro or not?

TREASURER:

No, no, no, it is committed to East West. That was the deal.

JON FAINE:

Well, it just sits there – it’s a billion and a half dollars just sitting there.

TREASURER:

[Inaudible] and it’s made $30 million in interest…

JON FAINE:

But it’s just sitting in limbo.

TREASURER:

No, it’s actually – the contracts haven’t been torn up. The contract is [inaudible]. We expect it to be built.

JON FAINE:

Fascinating. It’s been a very productive session and I hope you’ve got value from it as much as our listeners have.